Jun 13, 2007

Knowledge & The Working World - Part 1

As my regular readers will know, I recently made a career switch from law to investment banking. Commenting on this, a reader wrote:
"Given his legal background Mr. Wang is probably starting off his IB career in the structuring side focusing on the legal risk aspects of credit derivative contracts. Naturally, the IB team will want to have an experienced lawyer to navigate the legal risks that can be a tricky portion of credit derivative contracts.

Acquiring an understanding for evaluating the credit risk of reference entities and counterparties will probably take somewhat longer. Meanwhile, the mathematical valuation and pricing aspects of credit derivatives will probably elude him for quite a while, given that one needs a strong foundation in applied mathematics in order to grasp the nuances of this field."
In case you got lost in the technical jargon there, this is what the reader meant to say: Mr Wang may have moved from law to investment banking, but (a) he has probably been hired for his legal knowledge, and (b) he's probably clueless about the other, non-legal areas of investment banking.

Apparently, a logical deduction. However, it relies on certain implicit assumptions. These assumptions are commonly made in Singapore and aren't always correct.

In Singapore, we often tend to think that a person doesn't know anything about anything, unless he holds proper qualifications in it. By proper qualifications, we mean that he has gone to school, taken a course, passed his exams and been awarded a certfiicate, a diploma or a degree. Preferably one recognised by the Ministry of Education.

Of course, this line of reasoning can go wrong for any number of different reasons. For example, a formal course may not actually teach anything relevant to what the supposedly-qualified person is really doing in his job.

Or skills acquired in one particular field or discipline may turn out to be surprisingly transferable to another apparently unrelated field or discipline.

Or a person may acquire quite considerable expertise without any formal training at all - for example, through self-learning, practical work experience, or because the subject-matter happens to be his favourite hobby.

Last weekend I decided to organise my rather chaotic bookshelves and categorise my books according to topic. This picture shows a stack of banking and finance-related books that I've been reading over the past few years.



(Note: this stack of book excludes my law books on banking and finance - those are in another stack).

I could be wrong, but I suspect that my banking & finance textbooks are more than all the banking & finance textbooks that an undergrad student at SMU or NTU would have to read, over 3 or 4 years, in order to get a degree in Banking & Finance.

Now of course, I have not read all of my books with the same vigour and rigour that a university student, mugging for his exams, would have read his textbooks.

After all, my reading is not for the purpose of passing exams. My books are more for my leisure reading.

I started reading those books when I was a lawyer advising on banking and finance. I thought that it would be interesting to know what all those bankers were talking about.

Or sometimes a certain point would come up at work, and it would puzzle me, so over the weekend, I would just pick up the relevant book, zoom straight to the relevant chapter, and investigate that point. And if that was interesting, I'd just go on to read the next chapter as well.

As the years passed, I just ended up reading more and more.

And suddenly, I realise that if I add it all up, my total knowledge about investment banking is .... Very Not Insignificant. (Pardon the twisted language. I'm trying not to sound boastful here).

So while law is still my professional forte, I've come to understand enough about other areas of the financial world to feel comfortable in an investment banking environment. I know enough to engage constructively with the traders, the structurers, the salespeople, the quants, the lawyers, the accountants, the credit officers, the tax advisors, the economists, the relationship managers, the compliance personnel ... and whoever else I need to engage with.

To function effectively, I don't need to know everything that all of them know (which would be impossible and impractical). I just need to know enough about what each of them knows.

In Part 2 of this series, I will share some thoughts on information and knowledge networking. You might also call it "Why You Don't Need To Know It All, To Know It All".

30 comments:

Anonymous said...

You are ...... very diligent, Mr Wang.

Anonymous said...

Minus all the "In Singapore, we often tend to..." distraction, this post is basically about you defending yourself from what your reader said.

And what did your reader say? That you are not as capable or knowledgeable as you would like to think you are! And for that, you save his comment for several weeks and now cut and paste it here, together with a high definition close-up (did you specially put your camera on Macro setting?) of your books, stacked neatly, to make your point that hey, I. Wang-know-all is as knowledgeable as I claimed to be!

Such fragile ego!

(oh, I am not that reader. really.)

Anonymous said...

The day you find that you do no need to defend other people's comment on your salary or knowledge, that's the day you have truly arrived at level 5.

You,are still stuck at level 4 - esteem, ego needs. lol

Anonymous said...

Hi Mister Wong,

Like you I am very much into self improvement. I have been seeking into course such EMBA.

Today, EMBA is offered in NTU, NUS as well.

The point I want put forward to you is, whilst other EMBA programme is usually evening and weekend classes, the one offered in NTU is a 11 x full-day class. It seems they required their students to take day-off, annual-leave, unpaid-leave to attend such classes.

I am working in a MMC and don't really have such luxury of getting so many leave(s). The reception pointed out that most of their students are of public sector (natuarally explained why so many leave-days can be granted).

Damn, I can never get into any of this local universities...

Anonymous said...

EMBA is mainly for networking purpose. You really dont get to learn much.

Mr Wang Says So said...

I looked at the EMBA courses too. Basically I think I would find these kinds of courses quite distracting.

Personally I wouldn't do it, because I think I wouldn't be able to focus properly on the course AND on work at the same time.

I'd rather just quit work for a year, and do a full-time version of the course ... or just not do the course at all.

Also, I'm not sure whether it adds much career value (for myself, I mean - but of course this would vary from person to person, depending on your industry, your area of work etc).

Anonymous said...

"In Singapore, we often tend to think that a person doesn't know anything about anything, unless he holds proper qualifications in it."

You made a very good point. I recall some of your readers deriding people with a Arts History background as incapable of leading a technology company, and etc.. *sigh*

Those guys are really narrow-minded.

Mr Wang Says So said...

Heheh, if I were seeking to "defend" myself against Inspird's comment, I would have written an essay on the mathematical valuation and pricing aspects of credit derivatives.

Btw, I don't think Inspird was seeking to "attack" me. He just happens to be interested in these sorts of things, that's all. He runs a blog called "The Corporate Chessboard".

karen said...

"In Singapore, we often tend to think that a person doesn't know anything about anything, unless he holds proper qualifications in it."

Ah. This is indeed a troubling aspect of society that I can relate to because it is what used to make me nervous whenever my clients ask me about my course of studies in university.

My line of work sometimes leads me into in-depth discussions about investment strategies for my clients' portfolio, you see.

And I am an English Literature graduate.

Fortunately, it is also true that with time, and actual results to show, people stop asking you about your qualifications.

Or more interestingly, they assume you have that qualification.

Mr Wang Says So said...

That's very interesting, Karen. I happen to know another English Literature graduate who's now doing credit risk modelling and playing with Monte Carlo simulations every day.

He's also a published poet.

Anonymous said...

"I would have written an essay on the mathematical valuation and pricing aspects of credit derivatives."

Pls write it wang, so that I may have the pleasure reducing it to emental cheese.

Pls indulge me. I dare you!

darkness

Mr Wang Says So said...

How to price a credit derivative? Aiyah, use an asset swap pricing model, log on to Bloomberg, type the name of the reference entity, and see what price it is trading at in the cash markets, lor.

You need a default probability pricing model? I don't. I hold the reference obligations, collect income at $X, sell exposure (buy protection) at $Y, and collect the profit of $(X-Y).

Wooo .... The maths is so difficult, huh. :P

Okay lah, I'm kidding. Default probability pricing models ARE important, BUT in practice they're NOT used for pricing new CDSs, but only for valuing existing CDSs.

Since I'm in the front office and principally in the protection buyer's position, the default probability pricing models are NOT very relevant to me (because I've passed the reference entity's default/credit risk to my counterparty).

But basically, it would work on the same idea: as protection seller, just PV the cash flow and factor in the marginal survival probability and ( 1- recovery rate).

I also do CDOs, CLOs etc, but this goes beyond InspirD's question, and the maths is beyond me here; I handle other aspects.

Anonymous said...

"You need a default probability pricing model? I don't. I hold the reference obligations, collect income at $X, sell exposure (buy protection) at $Y, and collect the profit of $(X-Y)."

Previously, I thought you were just regularly writing clap trap, but this just goes a long way to demonstrate you are a very dangerous man wang.

What happened to the COP cost of capital that affects the base margin? Or is that just an insignificant percentile on the base sell take up rate?

What you going do now past that on another dept?

I tell you what, we cut to chase here, why don't you go and ask the boys in Bloomberg who developed the alog (there are only 4 guys involved in it) for the probability heuristics that is.

Its time to get another self help book!

darkness

Transferrable skills said...

Mr Wang: Or skills acquired in one particular field or discipline may turn out to be surprisingly transferable to another apparently unrelated field or discipline.

Agreed. I was ever employed to analyze/re-engineer business processes (incl purchasing, finance, etc) even though I was not trained in the business processes re-engineering nor even experience in the industry that sought my service. Basically it boils down to the boss (a director) noticed that I asked critical thinking questions while looking through their policies and procedures. He then decided that he wanted someone not from the industry, and thus had fresh perspectives to question the "obvious".

One catch though... the boss was an ang-moh. From my experience, people from Euro-western culture (regardless of race) are more likely to be more open to fitting persons to the job based on actual ability/performance than paper qualifications, age, sex, and what-nots.

Anonymous said...

The credit market is going to turn one day. How long do you think the party for leveraged credit products will last?

Sam said...

One of the best tests of whether qualifications are worthwhile is what the market thinks. Maybe the market - job market, economy, whatever - will value people who get the job done and achieve desired results more than people who simply have certain qualifications. When that happens (and it is happening in many places, particularly in successful organizations), these qualifications will be less significant.

Personally, I would much rather hire a high school dropout who is passionate, keeps his/her skills updated, and is focused on results than a person who has a business degree but now spends all their free time watching TV.

Anonymous said...

Mr. Wang said:

"After all, my reading is not for the purpose of passing exams. My books are more for my leisure reading. I started reading those books when I was a lawyer advising on banking and finance. I thought that it would be interesting to know what all those bankers were talking about. Or sometimes a certain point would come up at work, and it would puzzle me, so over the weekend, I would just pick up the relevant book, zoom straight to the relevant chapter, and investigate that point. And if that was interesting, I'd just go on to read the next chapter as well. As the years passed, I just ended up reading more and more."

Bravo, Mr. Wang. I've found myself that testing one's knowledge against the real world - in terms of directly applying what you read - is much more fulfilling than anything you could ever do in school.

Mr Wang Says So said...
This comment has been removed by the author.
Mr Wang Says So said...

And please, the Bloomberg page is just market data. Daily prices, bid and offer, for trading in the credit of liquid names.

Not that different from share prices blinking on SGX's website.

You and your probabiliity heuristics, LOL.

Mr Wang Says So said...

"One catch though... the boss was an ang-moh. From my experience, people from Euro-western culture (regardless of race) are more likely to be more open to fitting persons to the job based on actual ability/performance than paper qualifications, age, sex, and what-nots."

You are soooo right about that ....

Mr Wang Says So said...

"The credit market is going to turn one day. How long do you think the party for leveraged credit products will last?"


I dunno, but if it happens before I retire, maybe I'll move on to trading distressed debt, LOL.

I have an ex-boss who grew rich in the immediate post-1997 Asian crisis, rapidly building a niche in restructuring Indonesian bad debt.

There was sooooo much bad debt to restructure ..... and so much in legal fees to bill. :P

Mr Wang Says So said...

Heheh, Darkness, no, the cost of capital would not affect the pricing of the CDS. You see, if I can't offload the exposure to the reference entity, then the reference obligations will never come to my trading book; they will stay in the loan books or DCM books.

Since they don't come to my trading book, I don't have to hold any capital against them.

Assuming I do find a willing protection seller and I offload the exposure, then I pass the risk to the protection seller. So once again I don't have to hold any capital as against the reference entity/obligations.

What about exposure to the protection seller? Aha. While capital has to be held, the cost of capital does NOT affect the pricing of the CDS.

Why not?

Because I am -paying- for protection, on a CDS. I am not -charging- interest on a debt.

Or to put it bluntly, a credit derivative is NOT a loan. Hope you manage to understand that, LOL.

Y is what I *pay*. Y is not what I *receive*.

REGARDLESS of how high or how low my cost of capital is, I will always want Y to be as -low- as possible.

And the protection seller will always want Y to be as -high- as possible.

If you can buy something for $1, you wouldn't pay $2 for the same thing, would you.

If you can sell something for $1, you wouldn't sell it for $0.50, would you.

All this is quite regardless of what your cost of funding is.

There. Hope you understand now, LOL. No need to thank me.

Anonymous said...

Good Luck Wang. You know what the rabbit said Alice when she was in Wonderland don't you?

"How deep into the hole, do u want to go?"

Darkness 2007

Anonymous said...

Darkness said:
(((("Good Luck Wang. You know what the rabbit said Alice when she was in Wonderland don't you?
"How deep into the hole, do u want to go?"))))

Well, Wang has attempted to explain whatever little he knows about the subject. Now the ball is in your court. So pls dont go "huh huh huh how deep into the hole..." unless Wang is right and if so, pls do the decent thing and say so like a gentleman.

karen said...

Sam commented that it is wiser to employ people who are passionate about their work and can get the job done instead of employing someone based on their qualifications. I think the sad truth is paper qualifications is what get people through the doors first, before the rest can come into play. And there's the issue that it's often hard to accurately judge other aspects of a person - how curious their mind is, their attitude towards work and knowledge, etc - when interview wayang comes into play. This is a true challenge when it comes to assessing someone with little to no work experience. And when doors are closed for these young people, they are denied the accumulation of relevant experiences they mightily need to move forward in their field of interest.

This is a problem I am stuck with with my E.lit degree. Unless I go back to school again, or pursue a CFA, I don't see a chance of getting into the more sophisticated realm of the finance industry, say equities/economic analysis, no matter how much I may have learnt from my own reading or trading or how closely I watched the stock markets.

Because, apparently, thinking skills acquired in an E.lit course differs from the thinking skills needed to analyse stock markets trends.

veii said...

I got a degree in economics and spent over three years in IT. That had been the basis for much of the rest of my career since - business+IT.

Sam said...

Karen, thank you for your response; you make some good points. I admit that parts of the financial sector may be more risk-averse and still dominated by the "good-old boys club" that insists on having certain qualifications. If you want to get by without qualifications, the key may be to join a high-growth field that is more desperate for employees.

I work in IT in the USA and am outranked by:
1. someone who has no university degree
2. somone who has a two-year degree in computer networking
3. someone who has a two-year degree in electronics
4. someone who has a government degree
...and I have an English literature degree.

Otherwise, you can always do something so remarkable that everyone in your industry can't help but take notice. What exactly that would be, I leave up to you to decide :)

deus ex machinas said...

Dear Mr Wang,

I've been following your blog for sometime now and I always recommend it to my friends for the new perspectives and intelligent observations you offer.

But wit and intellect without hubris is starting to make some of your recent posts read more like the back cover of a self-help book and less like the smart Singaporean that we can all relate to so well.

cheers

karen said...

Hey Sam, Elit grad too? :)

I think we can agree that some industries are just more forgiving than others.

I've been doing some career evaluation lately since I'm nearing the one year mark in my first job. And I've actually considered one of the suggestions you've made -- do something remarkable. But alas, I have no idea how the world would know that I've done something remarkable in my spare time. So I've decided on the good old way of infiltrating the camp first, and then do some good old networking to see if I can get to where my interest lies.

sohcool said...

Hi,
I just happened to read this article.
I changed job in June too and am working for a risk management software. So these terms you wrote are not strangers to me but before June, I had never hear about them. Legs, SWAP, options, etc. . . .
And I agree with you. Ang mohs do not care about our degrees. It is the feelings during the interview. Is this person able to add value to this company? Is he motivated? Will he be comfortable in this company?

I tried to read about money market but I am not as passionate about it as you. If you do need risk management software, let me know.